0:02 Hello, and welcome to the Valens Company's Fourth Quarter and Fiscal Year 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. 0:30 It is now my pleasure to introduce your host, Everett Knight, Executive Vice President of Corporate Development and Capital Markets of the Valens Company. Thank you, Everett, please go ahead.

0:42 Thank you, operator. Good morning. Before we begin, on behalf of the Valens Company, we would like to give our warmest, heartfelt sympathy to any of our stakeholders in Ukraine or Russia or those who have family and friends in either country that are being unwittingly subject to an unfortunate political agenda that is unfolding there today. Our thoughts are with you. 1:06 Welcome to the Valens Company's Fourth Quarter and Fiscal Year 2021 Financial Results Conference Call for the period ended November 30, 2021. A replay of this call will be archived on the Investor Relations section of the Valens Company's website at thevalenscompany.com/investors. 1:25 Before we begin, please let me remind you that during the course of this conference call, Valens' management may make statements, including with respect to management's expectations or estimates of future performance. All such statements other than statements of historical facts constitute forward-looking information or forward-looking statements within the meaning of the applicable securities laws and are based on expectations, estimates and projections as of the date hereof. Specific forward-looking statements include, without limitation, all disclosures regarding future results of operations, economic conditions and anticipated courses of action. 2:01 These forward-looking statements are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. For more information on the company’s risks and uncertainties related to forward-looking statements, please refer to our latest annual information form or our latest management's discussion and analysis, otherwise known as MD&A, each filed as with the Canadian securities regulatory authorities at sedar.com or at The Valens Company's website at thevalenscompany.com or at edgar.com. 2:33 The risks described in the annual information form, which may cause the actual financial results, performance or achievements of the Valens Company to be materially different from estimated future results, performance or achievements expressed by forward-looking information or forward-looking statements are hereby incorporated by reference herein. Although these forward-looking statements reflect management’s current beliefs and reasonable assumptions based on current available information available to management at the date hereof, we cannot be certain that of the actual results that will be consistent with the forward-looking statements in the future. We caution you not to place undue reliance upon such forward-looking results. For any reconciliation of non-GAAP measures, measured and discussed, please consult our latest MD&A as filed on SEDAR and EDGAR. 3:18 Joining me on the call today are Mr. Tyler Robson, Chief Executive Officer; Mr. Sunil Gandhi, Chief Financial Officer; and Mr. Jeff Fallows, President. With that, I would now like to hand the call over to Tyler. Tyler, please go ahead.

3:34 Thank you, Everett, and welcome to everyone that has joined our earnings call to discuss our results for the fourth quarter and fiscal year 2021 ended November 30, 2021. To kick this off, I'll start by saying we're disappointed in the results to say the least, and we're not complacent and we're not satisfied with the numbers that we did put up in the quarter. And we've done multiple things since year-ended November to right size the ship, not only internally, but really focus on fundamentals. Before I give my thoughts in the quarter, I just wanted to thank our shareholders as we acknowledge the challenging capital markets environment and our share price. I assure you, we're suffering alongside with you as shareholders, and we want you to know that in nowhere are we happy with the situation and doing everything we can to ensure the public valuation accurately reflects the value we have created in our company. 4:21 Overall, our financial performance in this quarter was not up to my expectation, but we have made clear progress in the execution of our strategy, and I believe it sets us up for a successful 2022. Since November, we have not been complacent. We are now -- we have now made incremental changes in our business plan that set us better up for the year. In the fourth quarter, we were only firing on two or three cylinders. Provincial sales in Green Roads showed strong growth despite a very difficult industry drop back. However, one of our cylinders, B2B was not firing as we reconstructed it for future growth. 4:54 As a result, our B2B revenue significantly declined in Q4 as we finally made the shift, the aggressive shift away from fewer smaller companies to fewer, bigger, better. We did…

7:24 Thank you, Tyler. Looking back over 2021, we made big strategic strides in the midst of a tough global environment. However, as Tyler mentioned, it is very clear we still have work to do. After an acquisitive 2021, we entered 2022 with Canada's top innovative cannabis platform, a joint B2C and B2B offering that mimics large CPG companies and offers a unique opportunity for investors to gain access to higher-margin branded products. 7:55 Furthermore, the strategic decision to focus on larger, more consistent customers enabled Valens to operate more efficiently, generate higher margins through higher volume outputs, provide consistent manufacturing revenue and improve working capital. We are already starting to see momentum from this realignment and anticipate the benefits to flow through to revenue and gross margin growth through 2022. 8:20 We successfully increased our Canada-wide provincial listings by 21% to 219 at the end of Q4 2021 compared to 181 at the end of Q3 2021. We further expanded this to 255 at the end of January 2022. As expected, we have seen this translate into sales momentum in Q1 2022, and investors should expect growth in this area. Going forward, we will be removing underperforming listings that we have accumulated through acquisition and putting more resources into successful listings to drive utilization and profitability. 8:58 We introduced product listings as a benchmark metric during 2021 as we believed at the time that this was the best way to demonstrate to our investors the progress we were making in our branded product strategy. Starting in Q1, we will no longer be referencing this metric, but instead, we'll be giving our shareholders update on our market share. We now have a well-placed portfolio of brands in the market and expect to see strong momentum and market share gains from…

15:12 Thank you, Jeff. In the fourth quarter, we successfully closed the acquisition of Verse Cannabis and Citizen Stash, which propelled Valens' entry into the flower and pre-roll segment, which represents two of the largest categories in the Canadian cannabis market, currently accounting for over 70% of retail sales. We view the combination of these recently closed acquisitions to strongly position Valens' branded products across the value chain, significantly bolstering our innovative low-cost platform into flower. As consumers look for new and innovative products in the market, infused pre-rolls are anticipated to gain market share in Canada. The infused pre-rolled subcategory is growing rapidly and is positioned to be consumers' go-to product over non-infused pre-rolls as in mature markets in the US 16:05 As the subcategory represents 46% of all pre-roll sales in California in 2021, according to BDSA, with only a fraction of that in Canada today. Valens is well suited for significant gains in this category given its expertise in concentrates, pre-roll manufacturing and innovating in categories where complexities are apparent. 16:32 Subsequent to the quarter end, Valens began trading on the NASDAQ Capital Markets, which represents yet another important milestone that reflects our commitment to all shareholders as we continue to advance our global growth initiatives by capitalizing on the legalization of cannabis around the world and strengthening our corporate governance. We are already starting to see the benefits of trading on the NASDAQ with overall liquidity improving 47.2% just two months after listing. 17:00 It was a blockbuster year for IPOs in the NASDAQ along with companies switching to the NASDAQ in search for liquidity. In 2021, there were 753 IPOs on the NASDAQ compared to an average of approximately 161 annual IPOs in the last 10 years on the NASDAQ, representing a 368% increase. As…

22:16 Thank you, Everett. I will cover the financial results for the period just ended. Net revenue decreased by 12.3% to $18.4 million for the three months ended November 30, 2021, compared to $21 million in Q3 of 2021. This decrease in revenue was primarily driven by the transition of our B2B business to align with the fewer, bigger, better strategy to reduce working capital risk in addition to the negative impact of the floods in British Columbia, which resulted in significant supply chain disruptions. Specifically, the B2B revenue decreased by 53.9% to $4.1 million for the three months ended November 30, 2021, as we strategically transitioned away from our underperforming B2B partners during this quarter. Offsetting this decline, however, was a 31.7% increase in provincial sales and a 21.3% increase in revenue from Green Roads, reflecting the first full quarter of consolidation from Q3 2021. 23:23 Adjusted gross profit margin for the fourth quarter was 34.1% compared to 27.4% in Q3. The improved adjusted gross margin in our most recent quarter compared to Q3 was attributable to improved efficiencies in the Canadian operations by leveraging the newly completed K2 facility as well as the increased contribution of the Green Roads business to our overall sales mix. The adjusted gross profit margin is normalized for the impact associated with $3.6 million in inventory write-downs, which were mainly related to costs associated with discontinuing previous brand partner or B2B relations, namely faulty hardware and out-of-date packaging. 24:07 While we are making strides towards improving the margins in our Canadian business, we are still performing below our long-term expectations due to the inherent inefficiency of new production processes, especially those associated with new product launches. In addition, the impact of a globally tight labor market and supply chain challenges is resulting in…

30:24 Thank you. We will now conduct the question-and-answer session. [Operator Instructions] Our first question today is coming from Gerald Pascarelli of Cowen. Please go ahead.

31:03 Hi, good morning. Thank you very much for taking the question. I just wanted to try to bridge the margin progression. Obviously, nice expansion sequentially here in the fourth quarter. You did have a full quarter's benefit of Green Roads. And so looking forward, is the main driver behind the margin progression just positive mix shifts to your branded products in Canada as well as Green Roads? Do you expect both of those to go up as a percentage of your revenues? Or do you have any rate increases embedded in there, just in particular, given the current environment that CPG is operating in? Any color there would be helpful.

31:47 Yes, absolutely. Thanks for the question. I'll pass it to Sunil to tackle that one.

31:50 Yes. The progression in gross margin is expected to come from both sides of improved sales mix on the branded and the increased contribution of Green Roads over the course of the full year as well as our internal improvements in operating efficiency. We would not have factored in rate increases into our gross margin improvement profile for this year.

32:13 Got it. That’s – that’s very helpful. Just last one for me is on CBD. It seems like you are certainly increasing your penetration across the retail landscape in addition to e-commerce. Is there any broad color you can provide on how sales have been trending maybe post the quarter? Looking at the $5.7 million compared to the $4.7 million, it seems like sales would have been roughly flattish, right? But if you factored in the full quarter in 3Q, so just any color on any potential revenue progression that you're seeing at the Green Roads or whatever you are seeing would be helpful? Thank you.

32:54 Yes. Jeff, why don't you take that one?

32:56 For sure. Yes. So there would be a slight growth Q3 to Q4 there from that implied partial quarter in Q3. But I think largely, it was flat. That would be particularly as we're sort of getting our hands in on the business. Again, launching the strategies that you're now seeing come to bear, including some product rationalization, et cetera. As we look to Q1 and into 2022, obviously, we don't give guidance. But what I can say is the -- our Q1 from a Green Roads perspective is subject to, obviously, some seasonality and related to both the Christmas season and early January New Year season. As you know, in the US, a large part of the business gets done on the Black Friday and had sort of a lagging effect into December.

33:49 Got it. Thank you very much for the color. I will hop back into the queue.

33:54 Thank you. Our next question is coming from Neal Gilmer of Haywood Securities. Please go ahead.

34:01 Yes. Good morning, everyone. I was just wondering your thoughts on how we should be thinking of the B2B segment from here. Was this sort of decline that we saw bring the B2B segment to its trough? Does it grow from here when you're just focused on those fewer, bigger, better? Just sort of wondering how we should be thinking of that aside from, obviously, your own branded products into the marketplace.

34:26 Yes, absolutely. Thanks for the question, Neal. I would say the best way to think about it is growth. We have right size of the ship in B2B and what you're going to see is growth coming out of the B2B segment. Now that we've effectively moved on from some of the other people and the relationships have now materialized, and you will see growth.

34:44 Okay. Thanks for that Tyler. My second question, I guess, maybe just sort of your thoughts on your strategy to capture market share, your comment to move away from talking about product listings to capturing market share and also acknowledging if you're operating in a competitive marketplace. What sort of levers are you guys looking at to try to make sure that you capture that market share and grow it over the course of '22?

35:08 Yes. That's a great question. So I think the story for 2022 right now is distribution. 2021, we spent a tremendous amount of time on acquisitions and integration and innovation of products. All of that is now in there, and we've seen some products go out late January, early February. So right now, the simple tale of the tape for Valens is moving cases. We're going to open up distribution and that's where the growth is going to come from.

35:34 Okay. Thanks, Tyler.

35:37 Thank you. Our next question is coming from Andrew Partheniou of Stifel. Please go ahead.

35:46 Hi, good morning. Thanks for taking my questions. Maybe just starting off with my home province in Quebec, wondering if you could provide any updates? And maybe just thinking about it in a big picture sense, what kind of market share do you think you can capture in the province?

36:08 Yes. Thank you, Andrew. It's Everett here. I'd say we're just in the beginning innings of that strategy taking fruition. To be clear, actually, in the guidance we put out in our objectives, that does not include Quebec today. So all of those benchmarks that investors should be guiding us to and executing on doesn't include it, I would say that's upside. We're going to give more information on that throughout the year, and we'll give more transparency as it comes to fruition.

36:42 Thanks for that and my second question is on your listings and where you're at. You won a significant number of listings in the past several months, but I'm assuming it takes some time to ship the products and have them on the shelf after you win a listing. So I'm wondering if you can quantify or give us a sense of how many listings have yet to be shipped that you've already won? And if possible, if we could know any product formats like power edibles that make up a large percentage of those listings that have yet to be shipped?

37:20 Sure. Andrew, yes. So you can expect of that $255 million number as of January, 90% of those now have been in the market. It's probably kind of in the back half of Q1. So you can see that. I'd encourage all investors to look at the provincial sales increases on Hifyre that we've seen into Q1. But the remaining, we expect here shortly, but that does not include the new submissions that we've asked for in recent submissions for the OCS as well as other provinces as far as products go, I'll turn it over to Tyler.

37:57 Yes. Obviously, you're going to see innovation go live throughout the year, but I would say the biggest ones to look for, for Valens right now, as infused pre-rolls start to roll out, beverages, the innovation in beverages has been material, not only what's inside the can, but the re-sealable lid and a packaging innovation that we can do stuff no one else is thinking about and then edibles. I think edibles is going to start to move the needle as you see the growth in the US. continue to deliver. I think it will start to open up, up in Canada. So I think those are the biggest growth opportunities for us. And then again, just really getting back to distribution. It wasn't a key focus as far as last year was getting the right products under the right brands and the right provincial boards. Now it's about getting velocity behind them.

38:38 Thanks for that. I will get back in the queue.

38:45 Thank you. Our next question is coming from Frederico Gomes of ATB.

38:55 Yeah. Good morning. Thank you for taking my questions. Could you provide more color on your capital position? So I understand that you guys are expecting to improve the cash burn there. But given your liquidity right now, should we expect any equity raise this year? And maybe could you give any sort of guidance of your expected cash use in 2022? Thank you.

39:22 Yes. We -- first of all, to be clear, I think we expected the cash burn rate to improve along with the tracking of EBITDA. So as EBITDA is expected to improve, the cash burn rate will improve over the course of the year. I'd just say this, we raised $40 million subsequent to quarter end. Our integration initiative will reduce that cash burn in the coming quarters. So we're comfortable with our current balance sheet position.

39:47 Okay. Thank you. And then just, can you guys talk about the earn-outs that you have in place for some of the acquisitions you've done. So more specifically, I believe you have an earn-out for up to $20 million for Green Roads in 2022 and then $70 million for LYF Food in 2022 and 2023. So I'm just curious, as we approach those deadlines, how are you seeing the performance of those companies? And how likely is it that you will have to pay those earn-outs over the following quarters? Thank you.

40:23 Yes. Thanks for that question. This is Jeff. Obviously, that would come in line with providing some guidance, which we're not typically doing here. What I can say is twofold, number 1, from a LYF Food technologies perspective in terms of earn-outs, they were staged over a period of time. I can say that we have not paid an earn-out as of yet from that transaction. But secondly, I can say from an overall review of the acquisitions that we made in 2021 and as we look at our business plan and strategy for 2022, we continue to be very comfortable and very happy with where we're sitting. And that's the best guidance we're going to be able to give in terms of payouts of earn-outs right now.

41:13 Okay. Thank you. I will get back in the queue.

41:18 [Operator Instructions] Our next question is coming from Rahul Sarugaser of Raymond James.

41:30 Morning, gentlemen. Thank you so much for taking our questions. So first, I'd like to look a little bit at the US CBD sales. Last quarter, it was 4.7, I believe, on the partial quarter. This is a 5.7 for the full quarter. Back in the envelope, it would have suggested it should have been stronger than that. So could you give us a little more color in terms of why the number came in at 5.7, is that seasonal weakness? And how are you sort of seeing that business for 2022?

41:59 Yes. So again, as we took control of the business and started to implement some changes, you can understand that when we acquired the business, it had come out of a period of not a lot of capital availability, and they went through a lengthy sales process with us in terms of a lot of due diligence. So when we got -- when we got in there and we started to work with the management team, there was a number of initiatives we had to put in place, including looking at the product portfolio and realigning it, getting the brand campaign launching, et cetera. So I'd say -- that's really what you're seeing from the Q4 performance from Green Roads. But I also look, as we look into 2022, we're very comfortable with the trajectory that we're seeing now in that business. And as we said in our opening remarks, we're expecting growth from that business segment.

42:48 Great. Thanks Jeff. So just as a follow-up then, given the -- essentially the guidance that you guys put out on your Investor Day, to Board being EBITDA positive in the back half of this year. And given sort of the relative cost profile and let's assume some cost mitigation in that meantime, effective envelope would imply sort of a three times growth in sales from where you are. So not that that's impossible, but how should we be thinking about the split of that between sort of the B2B, the direct-to-consumer as well and then in the US.?

43:27 Maybe I'll look at that. I'll address that a little bit and also I'll turn to some of my partners here to answer as well. But again, achieving EBITDA positiveness, we're not expecting that to all come from revenue growth. Right? So as we've talked about, there's been an aggressive initiative launched already towards $10 million in savings. We also guided that there will be an additional $10 million in savings to come in 2022, applying that against our expectation of revenue growth in the quarter. That's where we get -- or in the coming quarters, that's where we get our view on positive EBITDA. And again, we're reiterating today that we're comfortable with that perspective. In terms of the breakout of where we expect some of that growth to come from north and south of the border, again, we're expecting by plus or minus 35% to 40% of that to come south of the border.

44:24 Perfect. Thanks so much, Jeff. Unless if anymore comments, we will get back in the queue.

44:32 Thank you. Ladies and gentlemen, at this time, I'd like to turn the floor back over to Mr. Robson for closing comments.

44:38 Thank you, operator, and everybody, for joining us today. To conclude, we are proud of the progress we made over the course of 2021. We look forward to showing investors how we can deliver our strategic goals throughout 2022. 2021 was an acquisitive year for the Valens -- for Valens and we are confident in our ability to further streamline our operations while growing top and bottom line. As we enter 2022, as an innovative branded manufacturing company, with that has invested in strategic automation. 45:12 In 2022, we expect to take market share, expand provincial sales and further growing our US presence. We believe we are well positioned for future growth. I can speak for the rest of our management team when I say we are now more excited than ever about the future of Valens as we continue to advance towards profitability. Again, I would like to thank everyone for their support and with that, I'll turn the call back to the operator to close. Thank you.

45:34 Ladies and gentlemen, this concludes today's event. You may disconnect your lines and walk off the webcast at this time and enjoy the rest of your day.